The Only Way To Trade Exponential Moving Average
During the last two days I presented basic techniques for beginners who would like to learn technical analysis trading techniques. More specifically I focused on my favorite indicator the Exponential Moving Average or EMA for short. The 1st day I covered the basics in the indicator and demonstrated the difference between your Simple Moving Average (SMA) plus the (EMA). The EMA proved additional responsive to short term selling price fluctuations and demonstrated better reaction to momentum and volatility. You can see by looking at this chart how much a lot more responsive the EMA can be when compared to SMA.
Please keep in mind that although I'm demonstrating this kind of with stocks, it applies for you to futures, commodities and currency markets just as well. And if you are daily trader, you can change the bars from daily to 5 minute and apply this kind of to E-mini Futures Contracts as well.
After demonstrating the effectiveness of the EMA when compared to SMA I adjusted the EMA for you to 20 day. This gives me a good period of time and makes the EMA more responsive to short term market swings. You can experiment with different settings but I suggest you start off with the 20 day.
After adjusting the EMA for you to 20 days I demonstrated the particular entry method that we will use to enter the market while using the 20 day EMA. We simply locate a stock that's trending strongly earlier mentioned the EMA, the more distance between your stock and the EMA the higher quality the trend.
The next step is always to wait for the stock for you to trade completely below the EMA pertaining to 5 days or less. If your stock trades below the EMA for in excess of 5 trading days the trade is nullified and if the stock trades completely above the EMA within the 5 trading days you could enter a buy stop order above the primary bar that trades completely earlier mentioned the EMA.
The final step we covered yesterday was best places place your stop loss level making sure that random price fluctuations or market noise doesn't mean you can be stopped out prematurely. My advice is always to place your stop at the EMA level immediately between your last bar that traded completely below the EMA plus the first bar that traded fully above the EMA. This may sound a bit confusing so take a look at this example for clarification.
One more step is to strategically place your profit target and that's something we will cover inside today's tutorial. You want to make certain and place your profit targeted at a level that will provide you with a solid risk to reward level. Most professional traders work with a profit to risk ratio of two to four. This method for every dollar you risk you should profit anywhere from two for you to four dollars.
This particular method will depend on short term price momentum and also volatility, therefore using a profit targeted that's designed to keep me looking for a long time will not work with this kind of strategy. A good tip is for you to always plan your exits good characteristics of your entry technique. I use a simple two one risk level with this method. I want to see quite strong momentum coming into the market immediately after I enter my purchase.
I simply measure the distance between my entry price plus the stop loss level and increase in numbers that number by two. Then I add that amount to my entry price that becomes my profit target with the trade. This ratio offers me a practical risk to reward ratio and provides me with to be able to take quick profits from the increase in volatility ahead of the momentum dries up once more.
In this particular example the distance between my entry price and also my stop loss level ended up being approximately $2.25 cents. I'd personally multiply that number by two and add that add up to my entry price, which with this particular case was $28.60. I then add $28.60 to $4. 50 and my profit target with this particular case would be $33. 10.
In this final example you can observe exactly where the entry plus the protective stop loss level are placed. Since we are selling short we'd subtract our risk level from our entry that would provide us with each of our profit target.
In this particular case danger level on the trade equates to $3. 00. We would increase in numbers that number twice and subtract it from our entry selling price. Since our entry was with $158. 00 and our risk level was $3. 00 we'd subtract $6. 00 from our entry price that would provide us with a profit target level of $152. 00 even.
Always remember that pure momentum strategies that provide volatility have lower profit for you to loss ratio than other technological trading methods. Also remember which the 20 bar EMA can always be adapted to any market and period of time. The only market I don't recommend you trade using this method is options.
Please keep in mind that although I'm demonstrating this kind of with stocks, it applies for you to futures, commodities and currency markets just as well. And if you are daily trader, you can change the bars from daily to 5 minute and apply this kind of to E-mini Futures Contracts as well.
After demonstrating the effectiveness of the EMA when compared to SMA I adjusted the EMA for you to 20 day. This gives me a good period of time and makes the EMA more responsive to short term market swings. You can experiment with different settings but I suggest you start off with the 20 day.
After adjusting the EMA for you to 20 days I demonstrated the particular entry method that we will use to enter the market while using the 20 day EMA. We simply locate a stock that's trending strongly earlier mentioned the EMA, the more distance between your stock and the EMA the higher quality the trend.
The next step is always to wait for the stock for you to trade completely below the EMA pertaining to 5 days or less. If your stock trades below the EMA for in excess of 5 trading days the trade is nullified and if the stock trades completely above the EMA within the 5 trading days you could enter a buy stop order above the primary bar that trades completely earlier mentioned the EMA.
The final step we covered yesterday was best places place your stop loss level making sure that random price fluctuations or market noise doesn't mean you can be stopped out prematurely. My advice is always to place your stop at the EMA level immediately between your last bar that traded completely below the EMA plus the first bar that traded fully above the EMA. This may sound a bit confusing so take a look at this example for clarification.
One more step is to strategically place your profit target and that's something we will cover inside today's tutorial. You want to make certain and place your profit targeted at a level that will provide you with a solid risk to reward level. Most professional traders work with a profit to risk ratio of two to four. This method for every dollar you risk you should profit anywhere from two for you to four dollars.
This particular method will depend on short term price momentum and also volatility, therefore using a profit targeted that's designed to keep me looking for a long time will not work with this kind of strategy. A good tip is for you to always plan your exits good characteristics of your entry technique. I use a simple two one risk level with this method. I want to see quite strong momentum coming into the market immediately after I enter my purchase.
I simply measure the distance between my entry price plus the stop loss level and increase in numbers that number by two. Then I add that amount to my entry price that becomes my profit target with the trade. This ratio offers me a practical risk to reward ratio and provides me with to be able to take quick profits from the increase in volatility ahead of the momentum dries up once more.
In this particular example the distance between my entry price and also my stop loss level ended up being approximately $2.25 cents. I'd personally multiply that number by two and add that add up to my entry price, which with this particular case was $28.60. I then add $28.60 to $4. 50 and my profit target with this particular case would be $33. 10.
In this final example you can observe exactly where the entry plus the protective stop loss level are placed. Since we are selling short we'd subtract our risk level from our entry that would provide us with each of our profit target.
In this particular case danger level on the trade equates to $3. 00. We would increase in numbers that number twice and subtract it from our entry selling price. Since our entry was with $158. 00 and our risk level was $3. 00 we'd subtract $6. 00 from our entry price that would provide us with a profit target level of $152. 00 even.
Always remember that pure momentum strategies that provide volatility have lower profit for you to loss ratio than other technological trading methods. Also remember which the 20 bar EMA can always be adapted to any market and period of time. The only market I don't recommend you trade using this method is options.
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